A term used in economics to describe the overall upward trend in pricing of goods and services over time is inflation. It is typically defined as the percentage rate of change in the price level over time and is frequently measured on a monthly or annual basis.
The consumer price index, which tracks the costs of a selection of goods and services that are often bought by households, is the most widely used indicator of inflation. High rates of inflation can be bad for an economy because they reduce the purchasing power of money and make it harder for people and businesses to make long-term plans.
Your purchasing power will decrease and you'll really have less money if the rate of inflation exceeds the interest rate on your savings. The purchasing power of your money will rise over time and you will essentially have more money if, on the other hand, the interest rate on your savings is higher than the rate of inflation. This should be considered when choosing how to invest and save your money.
There are a number of events that can lead towards higher inflation. In more recent times, this has been spurred on by the global pandemic. A few other events that could lead to inflation include:
If there is a high money supply in the economy, it is expected that there can lead to an increase in prices, meaning high inflation.
Prices may rise as a result of shortages when demand for products and services grows faster than the economy can provide them.
Including pandemics (covid19). Disruptions to the supply chain caused by natural disasters can lead to price increases and high inflation.
Government initiatives like tax or spending increases may cause inflation.
External factors like increased import costs or a depreciating foreign currency might cause inflation.
Consumers may be impacted by inflation in numerous ways:
Customers must spend more money to obtain the same things as a result of inflation-related increases in the prices of goods and services. This may lead to a reduced standard of living and less purchasing power.
The value of savings may be lowered as money loses value over time owing to inflation. Since money saved today could not have the same purchasing power in the future, it may be difficult for consumers to save and establish financial plans.
Inflation can lead to higher interest rates, as banks and other financial institutions try to compensate for the decreased value of money. This can make borrowing more expensive for consumers, leading to decreased access to credit and other financial services.
Inflation can lead to increased unemployment, as businesses may be unable to afford the higher prices of goods and services, leading to downsizing and job losses. This can impact consumers directly, as well as indirectly through the economy.
Overall, inflation can have a negative impact on consumers, reducing their purchasing power and standard of living, and making it more difficult to save and plan for their future financial needs.
In times of high inflation, the Bank of England increase Interest rates to slow the rate of inflation down. This can make it more expensive for individuals to borrow money to buy a home, potentially reducing demand for mortgages. Inflation can also lead to higher monthly mortgage payments for individuals who have already taken out a mortgage, as the interest on the loan will increase with higher interest rates after any fixed rate period expires.
It is difficult to predict the future trajectory of inflation with certainty. Inflation can be affected by a variety of factors such as changes in the economy, monetary policy, and global events. It is possible that inflation may fall after a year, but it cannot be determined with certainty. Due to the nature of how inflation is calculated, year on year. Even though prices may not come down, the actual rate of inflation may fall if prices stay at the same levels as they were at the same time during the previous year.
Yes, investing can help against inflation. Investing in assets that are expected to grow in value, such as stocks or real estate, can help protect against inflation by providing a potential source of capital appreciation. Additionally, investing in assets that generate income, such as bonds or dividend-paying stocks, can provide a source of steady income that can help offset the effects of inflation on purchasing power.
Investing can be risky. The value of your investments can go up or down, and you could lose money. It's important to carefully consider your options and do your research before making any investment decisions. It can also be helpful to diversify your portfolio and not put all of your money into one investment. This can help reduce your risk.
You should seek advice if you are considering investing to tackle inflation. If you are unsure where to start Sunny Avenue can help you find an adviser who can have a no obligation conversation around your financial needs. To get started, complete our Sunny Fact Find and we will arrange for the most suitable adviser to get in touch.
Stuart is an expert in Property, Money, Banking & Finance, having worked in retail and investment banking for 10+ years before founding Sunny Avenue. Stuart has spent his career studying finance. He holds qualifications in financial studies, mortgage advice & practice, banking operations, dealing & financial markets, derivatives, securities & investments.
Our website offers information about financial products such as investing, savings, equity release, mortgages, and insurance. None of the information on Sunny Avenue constitutes personal advice. Sunny Avenue does not offer any of these services directly and we only act as a directory service to connect you to the experts. If you require further information to proceed you will need to request advice, for example from the financial advisers listed. If you decide to invest, read the important investment notes provided first, decide how to proceed on your own basis, and remember that investments can go up and down in value, so you could get back less than you put in.
Think carefully before securing debts against your home. A mortgage is a loan secured on your home, which you could lose if you do not keep up your mortgage payments. Check that any mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice.